High-Frequency Trading: In-Depth Analysis From An Expert

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The concept of trading was introduced in the early days of the stock market. It gave rise to different styles and methods of trading that have changed over time. Among these changes, one of the most significant ones is high-frequency trading. It is a type of trading that uses powerful computers to place orders at very fast speeds. This type of trading has gained popularity in recent years and has become the subject of much debate.

The concept of HFT is often misunderstood. It’s commonly conflated with other types of automated trading, but the reality is that HFT is an algorithmic trading technique with its own set of risks and rewards. We have got Ezekiel Chew, CEO, and founder of Asia Forex Mentor, to share his insights on HFT.

What is High-Frequency Trading?

High-frequency trading, also called HFT, is a trading method that utilizes powerful computer programs to transact many orders in seconds. The powerful computer programs feature complex algorithms that analyze various markets and determine market conditions before executing the orders.

The profits are usually dependent on the speed of traders during the execution of orders. Those who are faster gain more than those who are slower in executing orders. HFT adds liquidity to the markets and reduces small bid-ask spreads. Large investment banks, hedge funds, and institutional investors use this trading method to get an edge in the stock market.

The extremely high speeds of orders are not just the only prominent feature of HFT, as it features high turnover rates and order-to-trade ratios. Even though quite successful and popular, some still criticized HFT strategies. The criticism is due to large companies gaining the upper hand in trading.

How does High-Frequency Trading Works?

While trading in a stock market, you can buy and hold or buy and sell. To earn significant profits from assets, market participants of HFT space usually purchase and have them and wait until the price increases to benefit considerably. The other option is also popular and more considerable when trading in high volume. The instant buying and selling of homes with a shallow margin increases when doing it in a high volume.

This low margin and high volume trading are referred to as HFT. HFT is done by computers that can do this without interruption. There are trading programs explicitly created to deal with high-frequency trading. These programs can fulfill a large number of orders at an exceptional speed.

The HFT programs have a higher speed than most other computer programs. However, high speeds are only attainable if the computer is near the stock market because a shorter cable enhances the transmission capacity. Once the buying price increases, these programs sense it immediately and tell the traders. When the trend reduces, the program will sell the commodities at the lowest value resulting in huge profit.

Factors to Consider before using High-Frequency Trading

Before you get started with high-frequency trading, there are some things that you need to consider to have a successful trading experience. If you have made up your mind to begin HFT, or you are doing it already and earning huge profits, you will feel the need to get a new computer.

HFT greatly depends on the complex computer programs explicitly designed for the purpose. Along with extensive knowledge about coding, you will also need an advanced computer with high speed and complex hardware and software. Also, it is important to keep these computers updated regularly. If you cannot do it independently, you can contact a high-frequency firm.

Another important factor to consider before using HFT is the location of computers. To have a successful experience during trading, the computers should be as near the exchange servers as they can be. This helps in the execution of orders. If you are looking for efficiency in the trading experience, you will have to monitor the real-time data feeds.

Why Choose High-Frequency Trading?

High-frequency is the fastest way to trade, making you trade in high volumes within milliseconds. The other multiple trading strategies cannot work as fast as this one or close. The special HFT programs scan and analyze the market to provide enough information for successful trading.

High-frequency trading allows you to practice volume trading and benefit from the tiniest price differences of the commodities. With this type of trading, volume trading ensures high returns and better profits. This is not the type of insurance or guarantee that you get in the case of manual trading. HFT also keeps the traders updated on the newest strategies to be prepared for the increasing market competition.

Volume trading and success are not the only things that make high-frequency trading a better option than many other trading techniques. The high-frequency trading algorithms analyze various markets at a time to monitor when the market is going up and allow traders or HFT firms tons to get the advantage of arbitrage opportunities.

You may not know but the New York Stock exchange updates its price to match the London price and it takes around 0.5 sec. In this short span of time, Euros are sold more on the York stock exchange as compared to London and the HFT traders take the opportunity to buy them in London and sell them on the New York Stock exchange, making a good profit.

High-Frequency Trading Consequences when Trading in Stock Market

HFT might have numerous advantages and benefits but the risks that it comes with. The dangers of high-frequency trading are very harmful to the overall economy. Some traders might also consider the exploitation of HFT algorithms.

Even though there are exceptional benefits of HFT, the risks cannot be ignored. This type of trading has a greater role in the crashing of stock markets. This exploitation of power and efficiency results in higher losses that cannot be recovered or reversed.

There was an incident in 2010 where the US stock market crashed in minutes. This has made people quite conscious. Some people also think this type of economic collapse is due to high-frequency trading. The consequences of HFT are always severe if exploited and not kept in check.

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Conclusion: High-Frequency Trading

No doubt, HFT comes with a lot of advantages, but its detrimental risk to economies is something unavoidable too. Traders who get greedy try to exploit this type of trading to get more benefits, but this might harm a country’s economy.

We cannot ignore the fact that not all traders exploit HFT, and some might benefit from the large number of advantages that it has to offer. If played safe, the gifts that high-frequency trading provides include high volume trading, short time frames, automated trading, and incredible speed.

The type of benefits that HFT offers are something that every trader dreams of. Any trader could be more successful, efficient, and strategic with HFT. All these factors are undeniable, but the exploitation needs to be monitored and controlled. The key is to find a way to only benefit from this efficient type of trading and avoid all the real-time risk it comes with.

High-Frequency Trading FAQs

Is it profitable to invest in high-frequency trading?

The profitability ratio depends on HFT strategies (automated market making, liquidity detection)and methods used for trading systems. HFT traders buy and sell assets rapidly in an attempt to profit from small changes in prices. If a trader knows how to use HFT without overtrading or taking on too much risk, then it can be quite profitable.

How much do high-frequency traders make?

High-frequency traders can make money if they use high-frequency trading strategies correctly. According to Ziprecruiter, the national average salary of high-frequency traders is $101,083 per annum, making it $49 per hour.